A fetish with carbon is driving up the price of electricity and destroying jobs

British Gas is putting up the cost of heating and
lighting the average home by up to 18 per cent, or about £200 a
year. Indignation at its profiteering is understandable. But that
can only be a part of the story: the combined profits of the big
six energy supply companies amount to less than 1.5 per cent of
your energy bill, according to the regulator, Ofgem.

Gas prices have gone up this year mainly because of demand from
post-Fukushima Japan and booming China. With energy now a big part
of household bills, genuine fuel poverty threatens many Britons
next winter.

So what does the Government plan to do? This week it publishes a
white paper on electricity market reform that will be predicated
upon, indeed proud of, pushing up prices even faster. To meet its
self-imposed green targets, the Government's policy is to tax
carbon, fix high prices for renewable electricity and load extra
costs on to people's electricity bills - but without showing them
as separate items.

This policy is beyond foolish. While you might just get away
with driving up energy bills in a boom, to add green stealth taxes
on top of supply-driven price increases at a time of economic
misery is asking for political trouble.

Cheap energy is the elixir of economic growth. It was
Newcastle's cheap coal that gave the industrial revolution its
second wind - substituting energy for labour drove up productivity,
creating jobs and enriching both producers and consumers.
Conversely, a dear-energy policy destroys jobs. Not only does it
drive energy-intensive business overseas; according to Charles
Hendry, the Energy Minister, the average British medium-sized
business will face an annual energy bill £247,000 higher by 2020
thanks to the carbon policy. That's equivalent to almost ten jobs
it must lose, or cannot create.

So the pain of this policy is huge. Yet even if it works, the
gain is tiny. The target is to get 15 per cent of total energy from
renewables by 2020 - the current figure is just 1.8 per cent, not
counting biomass and landfill gas. Most of that is old hydro; wind
contributed less than half a per cent.

And that was the cheap bit. The next generation of wind farms
are going to be offshore and their electricity will cost three
times as much. Even if we cover half the North Sea with wind farms,
at gargantuan expense to the wretched consumer, and they manage to
stay upright, we would still have to build gas turbines for when
the wind fails to blow - as usually happens in exceptionally cold
weather.

And, surprise, the energy companies are demanding subsidies for
building gas-fired power stations that are to be unprofitably
switched off when the wind blows.

Raising the costs of electricity to subsidise irrelevant wind
farms will fail to make the slightest dent in British carbon
emissions, let alone global ones. In any case, natural gas is going
to do far more than renewables ever could to accelerate the
decarbonisation of the world economy, as it replaces high- carbon
coal and oil in coming decades.

So the hijacking of energy policy by carbon targets is mad. Far
more urgent questions face us than that. How do we replace the
one-third of coal-fired stations that will close by 2015? Not by
renewables, that's for sure. How do we replace the capacity of our
nuclear power stations, all but one of which will close by 2023?
How do we compete with China, where it takes five years, not 15, to
build a nuclear power station? How do we compete with America,
where companies are now swimming in cheap domestic natural gas,
half the price it is over here, thanks to shale gas
exploration?

Gas already dominates the British energy market, providing about
half of all joules. That dominance will only grow as abundant shale
gas joins Russian and Iranian supplies. Given that renewables are
an irrelevance in terms of supply, and that coal is being slowly
phased out, the key question the Government needs to answer this
week is where it wants to fix the price of nuclear electricity to
ensure the long-term certainty nuclear investment requires.

Twenty years ago Britain liberalised its nationalised energy
markets, introduced competition and the result was one of the
cheapest and fairest regimes in the world. Gradually, the
bureaucratic yearning to interfere and pursue ideology gained the
upper hand again, especially with Tony Blair's ludicrous "renewable
obligation certificates" (ROCs) whose perverse consequences include
the shipping of Californian native forest timber to Drax power
station in Yorkshire at consumers' expense.

This week's White Paper is likely to suggest the replacement of
these ROCs with a guaranteed price for renewable and nuclear power,
partly reversible in the event that market prices exceed the
guarantee. Unless very well designed, this too will have perverse
consequences. In May alone National Grid paid wind farm users £2.6
million to switch their wind farms off.

Yet government has done very little to unleash energy
entrepreneurs. We could have started the shale gas revolution here,
as we started the fossil fuel revolution itself. We could still
start the underground-coal gasification revolution here: according
to a Newcastle firm called Five Quarter, huge amounts energy could
be extracted from coal seams under the North Sea by partial
combustion of the coal to make gas underground. We could push
thorium reactors. But starting a business in Britain's regulated
economy and planning system is like swimming in treacle.

The future belongs to countries that can get their
electricity, heat and fuel supplied as cheaply and reliably as
possible. That is the priority, not the carbon fetish.